Figure 5-13

Figure 5-13 illustrates the market for gasoline before the government imposes a tax to bring about the efficient level of gasoline production.
-Refer to Figure 5-13.If the government wanted to bring about the efficient level of gasoline production by imposing a tax, the tax would raise the price paid by consumers by ________ per gallon.

Question

Figure 5-13
  
Figure 5-13 illustrates the market for gasoline before the government imposes a tax to bring about the efficient level of gasoline production.
-Refer to Figure 5-13.If the government wanted to bring about the efficient level of gasoline production by imposing a tax, the tax would raise the price paid by consumers by ________ per gallon.

Quizplus · Accepted Answer

The efficient level of production occurs where marginal social benefit (MSB) equals marginal social cost (MSC), which in this case occurs at a quantity of 80 gallons and a price of $2.50 per gallon. To reach this efficient level, the government would need to impose a tax equal to the amount of the negative externality (the difference between MSB and private marginal cost, PMC) at the quantity where MSB=PMC, which is a tax of $1.25 per gallon (MSB=PMC at Q=80 and PMC=$1.25 when Q=80). Thus, the tax would increase the price paid by consumers by $1.25 per gallon, bringing the price from $2.50 to $3.75 per gallon ($2.50 + $1.25 = $3.75). Therefore, the correct choice is B.

Figure 5-13 Figure 5-13 Illustrates the Market for Gasoline Before the Government